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Growth of Private Equity Funds
Old 04-15-2005, 01:23 AM   #1
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Growth of Private Equity Funds

The private equity market really seems to be heating up this year. A month ago the Carlyle Group raised the largest equity fund ever, and this week Goldman Sachs put together an even bigger one at $8.5 billion.

As I understand it, these funds are put together for the purpose of purchasing companies (recent purchases include retailers, a software company, and a web music distributor). Typically, these purchases are highly leveraged (2/3 debt, 1/3 equity. The companies they buy are held for a period of time with the expectation that they will be resold at a profit.

The prevailing wisdom about the stock market is that returns will be modest in coming years, because market valuations are high. Value investors bemoan the lack of opportunity.

On the other hand, some very savvy financial firms appear to believe that the market offers some appealing opportunities at these valuation levels. I expect that the present level of interest rates also factor into their decisions.

So here's my thesis: isn't the fact that these firms are raising billions to buy up companies bullish for equity markets? It suggests (a) that there are companies which can be purchased now with the expectation of resale at a higher price in the forseeable future, and (b) that the leveraged purchases these funds make will increase demand-side pressure in equity markets.

Ok, fire away. I am no expert in LBO's, and don't propose that anyone change their own strategy based on these developments, but they do give me hope that someday my S&P index funds may see 1250.

rapoole
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Re: Growth of Private Equity Funds
Old 04-15-2005, 02:46 AM   #2
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Re: Growth of Private Equity Funds

I agree with your view on this rapoole. Alas,
"someday" doesn't do it for me.

JG
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Re: Growth of Private Equity Funds
Old 04-15-2005, 03:13 AM   #3
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Re: Growth of Private Equity Funds

Quote:
I agree with your view on this rapoole. Alas,
"someday" doesn't do it for me.

JG
JG, are you up and posting prior to 5AM because you don't have much time left and don't want to waste a minute of it?

Or are you just an old f*rt with insomnia?

REW
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Re: Growth of Private Equity Funds
Old 04-15-2005, 03:27 AM   #4
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Re: Growth of Private Equity Funds

Good morning REW. Actually, neither (well, I am an old
fart I suppose) DW leaves for work at 5:30 and I always get up for my goodbye kiss (Ain't that sweet?)
90% of the time I am back in bed before she clears the
driveway

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Re: Growth of Private Equity Funds
Old 04-15-2005, 06:29 AM   #5
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Re: Growth of Private Equity Funds

I met a private equity man and he said they don't quite put up the amount of leverage they used back in the good old days. He said their group was finding most of their buys in private companies. As to whether they are good for market...don't know about that one.

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Re: Growth of Private Equity Funds
Old 04-15-2005, 07:07 AM   #6
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Re: Growth of Private Equity Funds

Wildcat-

Well if these private equity funds are primarily aimed at buying private companies, they may not have much of an impact on equity markets. However, some of the companies recently in the news as private equity targets are public companies (the retailers come to mind). And the huge size of these recent funds suggest larger targets.

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Re: Growth of Private Equity Funds
Old 04-15-2005, 09:04 AM   #7
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Re: Growth of Private Equity Funds

Only one problem with them buying the public companies. It seems like they would have to cut through more red tape (insiders and shareholders) in order to buy. Circuit City offer was out the door in a heartbeat and the price of the stock dropped when people realized it was just Circuit City again. I think the motive behind the retail craze is the real estate. I don't think these guys want to turn it around if you know what I mean & I would imagine that doesn't sit well with corporate executives that are making the big bucks. But I will take 1250 any way I can get it so I don't care if I am wrong.
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Re: Growth of Private Equity Funds
Old 04-15-2005, 08:17 PM   #8
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Re: Growth of Private Equity Funds

One factor to consider is that these funds have a limited time horizon, and then they're expecting a liquidity event, like an IPO ... the horizon is usually fixed by the fund's documentation, and will be 6 to 8/9 years or so. The event could also be a sale to a strategic buyer.

I think you're thesis has some logic to it ... there is a lot of liquidity out there, chasing investments. With the high cost of SarBox, we may see more public companies taken private ... estimated cost to be a public co. now is $3M per year.
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Re: Growth of Private Equity Funds
Old 04-15-2005, 08:35 PM   #9
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Re: Growth of Private Equity Funds

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The private equity market really seems to be heating up this year.
Berkshire Hathaway has been doing this for decades. Eddie Lampert and the Danahers have leaped aboard. And after a "valuation day" like today, I'm sure they're all smiling!

Tweedy, Browne Global Value dropped below its 10-day MA again and is headed for the MA(50). Sniff, sniff... I smell an IRA conversion coming this way... and maybe harvesting some more of the last three months' runup?
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